International Trade

1. International Trade • Key Concepts: • Economic Interdependence involves producers in one nation that depend on producers in other nations to supple them with certain goods and services • Why it Matters: Nations choose to produce some things and trade for others.

2. Resource Distribution and Specialization • Nation’s economic patterns based on factors of production it has • Patterns change over time (U.S. agriculture to technology) • Specialization occurs when narrow range of products are made; this leads to: • Increased productivity and profit • Economic interdependence-reliance on others for products not made

3. Specialization • Costa Rico exports bananas; wet climate bananas need • Relatively low wages are beneficial • Production is labor intensive • New Zealand exports wool, lamb and mutton • Has temperate climate, H2O, open grasslands needed for grazing • Has low population density, scientific breeding, mechanized processing

5. David Ricardo: Comparative Advantage • Trading in Opportunity • English Economist 1772-1823 • In his time: international trade was based on absolute advantage • Ricardo showed nations can benefit from comparative advantage • Produce products it can make at lower opportunity cost that others

6. Absolute and Comparative Advantage • Absolute advantage: nation’s ability to make product more efficiently • Due to uneven distribution of production factors in different areas • Comparative advantage: ability to produce at lower opportunity cost • Absolute cost of product not important, just opportunity cost

7. Absolute and Comparative Advantage • Absolute Advantage Examples • Australia produces more iron ore and steel than China with same labor • Australia has absolute advantage • Before Ricardo, logic held Australia should not trade for either • Comparative Advantage Examples • Law of comparative advantage: countries gain when produced items they are most efficient at producing • And are at the lowest opportunity cost • If Australia’s ratio of steel to iron ore is 1:15 tons and China’s is 1:3, China has comparative advantage in steel production

9. Advantages of Free Trade • If China, Australia specialize, set trade ratio steel to iron ore 1:4 • China gets 4 tons of iron ore for 1 of steel • Australia gets 1 ton of steel for 4 of iron ore: cost 5 before • Specialization, trade raise nations’ production ratios, world output • Increased output is mark of economic growth

10. International Trade Affect the National Economy • Exports: goods and services produced in one country, sold in others • Imports: products produced in one country, purchased by another • Costs and benefits of international trade vary by nation • Economists examine impact of exports and imports on prices and quantity.

11. Impact #1: Exports on Prices and Quantity • If a country begins exporting product, foreign buyers increase total demand • Demand curve shifts right, sets higher equilibrium price • Higher prices at home offset by more jobs and income • Created by production expanded to meet demand

12. Impact #2: Imports on Prices and Quantity • Imports shift supply curve right, lowerequilibrium price • Lower prices lead domestic producers to offer less of the product • Improve efficiency, worker productivity, customer service • Trade gives consumers increased selection of goods , lower prices • Gives producers new markets, chance for more profit

14. The U.S. in the World Economy • U.S. is world’s largest exporter; exports more services than imports • Tourism, transportation, architecture, construction, information systems • Also world’s largest importer; imports more goods than it exports • Oil and refined oil products, machinery, raw materials • Main trading partners: Canada , China, Japan

16. Trade Barriers • Most nations pass trade limit laws to protect domestic industries • Laws lead to higher prices, economic retaliation by other nations • In long run, industries can only be saved by becoming competitive • Trade restrictions are basically a political issue

17. Trade Barriers • Types of Barriers • Trade barrier: law limiting free trade among nations; most mandatory • Quota: limits on the amount of a product that can imported • Dumping: sale of product in other country at lower price than at home • Hurts domestic producers; gives consumers lower prices

18. Type of Trade Barriers • Tariff: fee charged for goods brought from another country • Revenue tariff: tax on imports, specifically to raise money • Rarely used today • Protective tariff: tax on imported goods to protect domestic products • Raise price of goods more cheaply elsewhere

19. Impact of Trade Barriers • Trade Barriers may temporarily save domestic jobs • Lack of competition promotes inefficiency, higher prices • Trade limits can lead to trade war: • Succession of increasing trade barriers between nations

20. Impact of Trade Barriers • #1: Higher Prices • Trade barriers raise prices or keep them high • In 2000, U.S. & Japan set tariffs on S. Korean semiconductor chips • Korean and domestic chip prices went up in U.S. & Japan • #2: Trade Wars • Trade wars often result from disagreements over quotas or tariffs • Can result over other issues • EU banned U.S. hormone-treated beef, U.S. set 100% tax on many EU foods

24. Arguments for Protectionism • Protectionism: use of trade barriers to protect domestic industries • Purpose: to protect jobs, national security, infant industries (new industries unable to compete with larger, established competitors)

25. Arguments for Protectionism • #1: Protecting Domestic Jobs • U.S. workers upset over jobs lost to countries with cheaper labor • Trade barriers generally protect inefficient production, prices higher • Laid-off voters influenced government to fund job training programs

26. Arguments for Protectionism • #2: Protecting Infant Industries • Protection expected to allow new industries to grow until competitive • Used by developing nations to keep out goods from developed countries • Critics say freedom form competition maintains perpetual infancy; • And need for perpetual support

27. Arguments for Protectionism • #3: Protecting National Security • National security affects industries considered vital for safety • Energy industry considered vital by most nations • Political differences exist over which industries are truly vital • 2006 Dubai forced to abandon deal to operate several port facilities • Critics doubted security concerns, worried over interference with trade

28. Foreign Exchange Market

29. Rates of Exchange • In 1800’s, early 1900’s gold standard determined value of currencies • Fixed rate of exchange: nation’s currency constant in relation to others • Post WWII to 1970’s: currencies pegged to USD: 1 oz gold = $35 • Flexible rate of exchange (floating rate): changes along with currency’s supply, demand • Regulates foreign exchange, balancing imports and exports

30. Strong and Weak Currencies • Trade-weighted value of the dollar - international value of U.S. dollar • Measured by Fed • Weak dollar makes imported goods more expensive • Easier for domestic goods to compete • Exports become cheaper, easier to sell

31. Strong U.S. Dollar

32. Balance of Trade • Balance of Trade: difference between value of imports and exports • Balance of payments: all transactions between nation and rest of world • Includes government and private transactions, both trade and investment • Trade surplus: nation exports more that imports; favorable balance • Trade deficit: nation imports more than exports; unfavorable balance

34. Balance of Trade • U.S. –China Trade • China undergone one of the most rapid industrialization in history • Has pegged yuan at fixed rate vs. dollar; keeping yuan weak • Made U.S. top destination for Chinese exports • China has record trade surplus of $200 billion with U.S.

35. The U.S. Trade Balance • 1770-1870: U.S. had deficit in products; surplus in capital investments • 1870-1920: paying back debt; was exporting > importing • 1920-1945: had surplus in exports; deficit in foreign investment • 1945-1980: deficit in merchandise; deficit in foreign investment • Today: surplus in foreign investment; merchandise deficit

37. Modern International Institutions • Regional and World Organizations • Free-trade zones: areas where nations trade without protective tariffs • Customs unions: agreements that abolish trade barriers among members • Establish uniform tariffs for non-members • Some trade groups called common markets

38. The European Union • 1957: six European nations created Common Market: became EU in 1993 • European Union: economic and political union; no barriers for members • Euro: currency of the EU; used by 12 of 27 member nations • EU has 20% of global exports and imports; worlds biggest trader • Sets low tariffs; wants to remove all barriers to international trade

39. North American Free Trade Agreement • Adopted 1994 Also known as NAFTA • Phases out trade barriers between Canada, Mexico & U.S. • Has led to specialization, efficiency, expanded markets, new jobs • Also competitive advantage over EU and Japan • All countries have had economic gain • Trade has more than doubled

41. Other Regional Trade Groups • Various groups formed to specialize, promote free trade, stay competitive • Mercosur: South America • ASEAN: Southean Asian Nations • APEC: Asian Pacific Market • SADC: South Africian Development Community • OPEC (Organization of Petroleum Exporting Countries) • OPEC is a cartel • Group of producers controls production, pricing, marketing of a product

43. Other Regional Trade Groups • World Trade Organization • 1944 Allied nations formed General Agreement on Tariffs and Trade (GATT) • WTO formed in 1995 by nations that follow GATT • Negotiates, administers trade agreements • Resolves disputes • Monitors policies of 149 members • Gives support to developing countries • WTO successful to varying degrees

44. Multinationals Bring Changes • Key Concepts • Multinational corporations affect many different nations • Must deal with different sets of tariffs, labor restrictions, taxes • Often bring jobs and technology to developing nations • Boost overall levels of international trade

45. International Trade W/in Multinationals • Intrafirm trade is trade between various divisions of a multinational • Exchange of goods between two parts of the company • Coordination of production between parts of the multinational • Materials or parts sent to overseas affiliate count as exports • Intrafirm imports count as imports in balance of trade

46. Multinational Example • World Wide Cellular • Mines raw materials in Australia • Manufactures phones in South Korea • Markets phones in Europe • Provides customer service from India